China has come up with a post-COVID-19 recovery package focusing on stability and tech innovation, without a GDP growth target. Nicholas Chui of Aberdeen Standard explained the logic behind this unusual package and shared his new equity investment themes.
29 June 2020
Recently, the Chinese government revealed its economic recovery package post-COVID-19. Much different from the 4-trillion RMB stimulus package China adopted in 2008 amid the global financial crisis, this recovery package has a much smaller headline figure but has a clear focus on supporting economic stability, SME development and technology innovation. It is also the first time for decades that China has scrapped a GDP growth target. What is the logic behind this unusual package and how does it translate into equity investment themes in China? ATC Initiative interviewed Nicolas Chui, Investment Director of Aberdeen Standard and Lead Manager of Aberdeen Global China A Shares Equity fund, one of the largest China A-Shares equity funds with USD3.4 billion under management.
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Q: Chinese government recently announced its COVD-19 economic recovery package. What is it aimed to achieve?
- Two main goals of this package: stability and growth.
- Stability: Targeted lending to SMEs, which has growing importance as employers in the economy;
- Growth: Targeted lending to IT-related infrastructure (5G, AI, IOT) which represents the future.
Q: For the first time in many decades, China has not set a GDP growth rate target for this year. How do you interpret this change?
- It is a very sensible approach in the highly dynamic and uncertain situation, providing more flexibility to the business entities;
- It avoids unnecessary pressure on local government to embark on projects with unintended consequences;
- It reflects the maturity of the central government in decision making.
Q: What are the major differences between China’s 2008 stimulus package and 2020 recovery fiscal measures and what is the logic behind these differences?
- No big-bang headline number this time; “under-promise, over-deliver” instead of “over-promise, under-deliver”;
- Since 2008, the economy has transformed in terms of GDP mix from infrastructure driven to consumption/service driven.
- In 2008 money mainly flew to tradition infrastructure (roads, railways, etc.). Now in this package, there is still infrastructure investment but mainly in high-tech infrastructure as an enabler to growth in other areas such as consumption and healthcare.
Q: What role can China play in the world economic recovery this time?
- China will continue to be a key source of supply and demand. COVID-19 impact will be temporary rather structural;
- China came out of the crisis earlier and in better shape; the speed of response has been fast; City lockdown time, if needed, is getting shorter. All these boost confidence of minimum disruption of supply;
- Demand-side: people are coming out to spend, making a contribution to global demand;
- China will act as a stabilizer post-COVID-19 with even more importance.
Q: Which sectors/asset classes will the fiscal measure benefit and what are the major equity investment themes in China in the short and long term?
- Increasing capital will go to technology infrastructures such as 5G and AI. We are excited by this sub-sector;
- Consumption and healthcare are indirect beneficiaries of the package. They will be boosted by the technology enabler such as 5G.
Q: What is Aberdeen Standard’s investment approach to China market? How has your fund fared during the pandemic and how did you investors react? What is your suggestion to global investors in their steps to allocate to China market?
- Aberdeen Standard’s China A-share investment key compass:
- (1 )Bottom-up quality-driven approach;
- (2) Attention to corporate governance;
- A lot of global investors still underweight China in their portfolio, which will need to change;
- We believe active investment with quality bias in China provide more benefit than simply investing in a benchmark;
- ESG, especially corporate governance, can unlock additional alpha if a manager can effectively engage with the underlying companies to improve their corporate governance.
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